Tuesday, June 6, 2017

Just over seven years ago, I was asked to participate in an SEC Market Structure Roundtable in Washington DC. Joining me on the High Frequency Trading Panel,
besides HFT practitioners from RGM and Getco (and others), was Babson
College’s Professor Michael Goldstein. He was notable at that time, as
he asserted that the markets were trading too fast, with dubious
benefit. His viewpoint was in stark contrast to the existing HFT
Academic Study Consensus (see slide above).

This paper, like others that have been released post-Flash Boys,
demonstrates that “HFT” does not sit there, magnanimously providing
liquidity for us all to interact with at our choosing, contrary to the
assertions by every NYSE DMM, for example. In this paper, Goldstein
examines data from the ASX post 2012, when the ASX adopted ITCH (like
NASDAQ). He looked at order depth of book data from the direct feeds,
and armed with participant classifications from the ASX (Retail,
Institutional, HFT), was able to dissect exactly who was trading, and
when.

It turns out HFT adds liquidity on the thick side of order books, and consumes liquidity on the thin side. During periods of volatility, their use of the order book imbalances to aggress and take liquidity is more pronounced.

We find that HFT trade more
aggressively and are more successful at picking off stale orders from
institutional and retail investors when the market is volatile. However,
by demanding liquidity from the thin side of the order book, one
consequence is that HFT could potentially exacerbate future limit order
book imbalances.

He adds:

HFT have a crowding out effect on non-HFT limit orders, which potentially increases non-HFT limit order execution costs...